The merger of Tesla and SpaceX: Wall Street says it's inevitable, but Musk says it's not certain yet

Akash Sriram

Reuters, October 21 - Elon Musk believes that merging Tesla TSLA.O with SpaceX SPCX.O would be “highly beneficial,” but the decision is not his to make: two special committees he cannot participate in, as well as what he describes as the “high threshold” of a Tesla shareholder vote, all stand in the way of the merger.

This tension underlies a deal that many analysts describe as “inevitable.” Musk, who describes himself as a party with a conflict of interest, says that despite Wall Street’s expectation for the deal to be concluded by the end of next year, the two committees have yet to agree on terms, and the merger is not set in stone.

SpaceX shares rose 9%, and Tesla was up 1% in pre-market trading.

SpaceX and Tesla are jointly developing the Terafab chip plant, and AI business has already accounted for over half of SpaceX’s revenue. The company is expected to invest another $35–40 billion in further expansion in Q4.

“I think a Tesla-SpaceX merger makes a lot of sense. It’s highly strategic, as both companies are rapidly advancing toward AI and autonomous systems, and both have massive infrastructure projects underway,” said Justus Parmar, CEO of Fortuna Investments and an investor in both companies.

“It also avoids duplicated work, saves him time shuttling between the two companies, and reduces high public company management, legal, and administrative costs.”

Analysts noted that the rising capital expenditures for costly AI and space infrastructure would drag on SpaceX’s free cash flow, but a merged entity could alleviate that pressure through shared services and joint borrowings with Tesla.

They also highlighted that at last week’s Roadster launch event, a Tesla car equipped with SpaceX rocket thrusters flipped and leaped over a truck—suggesting the kinds of feats an integrated company might achieve in the future.

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Tesla's vote is a key hurdle

Control is likely one of Musk’s motivations for pursuing the merger. Through super-voting stock, Musk holds about 85% of the voting rights in SpaceX, but only about 20% in Tesla.

Bill Birmingham, Head of Research at REX Financial, estimates that the billionaire would obtain about 57% of the voting rights after the merger.

Ryan Zurrer, founder of Dialectic, believes that under Barclay’s proposed 0.7:1 share swap ratio (i.e., one SpaceX share for one Tesla share), Musk would gain 58% of the voting rights.

No agreement on the swap ratio has been reached yet. Zurrer said if Musk sells more equity, a ratio closer to 0.6 would be needed to maintain control, and he noted that “the biggest hurdle will be the interplay between Tesla shareholders’ votes and Elon’s own incentives.”

Musk says Tesla will need majority support of all shares, not just a majority of votes cast, so every uncast ballot will create an obstacle for the deal. Analysts have included voter turnout as a risk factor, noting that broker non-votes at last year’s shareholder meeting may be a critical factor in determining whether the deal passes.

Governance and regulatory issues will follow. When Tesla acquired SolarCity in 2016, it took years of litigation before a Delaware court finally approved the deal, but noted that Tesla should have formed an independent committee.

“Having the same individual on both sides of a transaction will raise serious corporate governance concerns,” said Josh Gilbert, Chief Analyst for Asia Pacific at eToro.

Beyond the process, the business case could also be decisive. Ipek Ozkardeskaya, Senior Analyst at Swissquote, said that if Tesla finds it more advantageous to seek AI synergies with other firms, “the deal might be vetoed by investors.”

Tesla will report third-quarter earnings after the close. Analysts say they will also closely watch for merger negotiation disclosures in regulatory filings before the automaker’s December 3 annual shareholder meeting.

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